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Clamping down: The era of new regulation

The UK investment industry is being hit with a barrage of new regulation as the FSA, the Treasury, HM Revenue & Customs and European watchdogs look to consign flawed investment practices to the history books.

The current era of regulatory transition arguably began after the FSA first outlined plans to clamp down on retail investment distribution when it launched its June 2007 discussion paper ‘A Review of Retail Distribution’. But it has been the catastrophic failure of a handful of firms that has played the greatest role in catalysing the current cycle of regulation of UK investment distribution.

Chief among the failures was structured product and life settlement fund provider Keydata. In June 2009 the firm was put into administration by the FSA, when it was discovered the firm had sold non-compliant Isa investments and was unable to meet its tax liabilities.

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But the situation at Keydata ran deeper than simple tax liabilities.

By July, the FSA had brought in the Serious Fraud Office to investigate the misappropriation of £103m of assets held by Keydata subsidiary SLS Capital – assets that to date have not been located. The Financial Services Compensation Scheme (FSCS) in November 2011 started compensating SLS’s investors.

In November 2009 another Keydata business, traded life settlement policy fund provider Lifemark, was placed under provisional administration amid a solvency crisis, in part triggered by the collapse of Keydata. By the following February, Lifemark’s bonds were suspended from trading and by September the FSCS announced plans to compensate that firm’s investors.

At the time Keydata’s insolvency was discovered, Arch Cru was also suspended after the financial crisis had raised questions over its speculative investments.

The Keydata crisis affected roughly 30,000 clients who had placed £449m in the firm’s Lifemark and SLS products. The majority of the both firms’ wares were distributed by intermediaries including financial advisers.

The bodies that regulate financial services have since gone into overdrive.

EU regulators clamping down The European Union (EU) continues to amend its Markets in Financial Instruments Directive (Mifid) to achieve harmony of investment practices across the continent, and to enhance investor protection requirements.

The EU has most recently clamped down on exchanged-traded funds (ETFs) – trackers that can be bought and sold as single shares listed on a stock exchange.

The European Securities and Markets Association (Esma) issued ETF guidelines in January 2012, in a consultation that closed at the end of March, focusing particularly on curbing ETFs that purport to be structured as regulated Ucits funds.

The ETF concerns have been supported by the UK’s regulators. In June 2011, FSA director Sheila Nicoll revealed that the UK was working with the EU over restricting ETF sales. FSA asset management sector team manager Tony Hanlon warned in an April 2012 investment conference that many ETFs were being sold with the claim that they comply with the Ucits rules when, in fact, they do not.

Another major European initiative has been the Ucits IV regime, which came into force on July 1 2011. This regime aims to make the process of selling funds across Europe more efficient, but also includes stricter requirements for fund managers including the publication of key investor information documents (Kiids) to simplify fund objectives and attributes for clients. European lawmakers have also launched the Alternative Investment Fund Managers Directive (AIFMD), which focuses mainly on hedge funds and private equity but also counts structures such as funds of funds and investment trusts as under its auspices.